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PROBLEM STATEMENT
The reason is that conventional micro financial institutions charge interest on
their loans provided to small and medium enterprises as well as women
entrepreneurs. A vast majority of muslim population refrains from availing
conventional micro financial services due to the element of interest that is
considered repugnant to Sharī’ah. In this scenario, Islamic micro finance has
tremendous potential in these countries and could be used as a powerful weapon
to fight against poverty. It can develop a valuable human capital base by
satisfying the financial needs of Muslim community and positively contribute
towards the economic growth in those countries.
INTRODUCTION
Microfinance refers to making small loans available to poor people (especially
those traditionally excluded from financial services) through programmes
designed specifically to meet their particular needs and circumstances (Khan,
2008; p.6). The needs of the poor in Islamic countries are no different from the
poor in other societies except that these are conditioned and influenced by their
faith and culture in a significant way. They need financial services because they
are often faced with events that call for spending more money than might be
available around the house or in the pocket (IRTI, 2007, p.20)
The Islamic world is enormous with over 1.2 billion people, stretching from
Senegal to the Philippines. Poverty rate is quite high in all Muslim countries
except a few countries in Southeast Asia and the Middle East. Poverty levels
have also been associated with high inequality alongside low productivity. Half
of the Indonesia population (about 129 million) is living below the poverty line
of US$2 a day. While in South Asia two largest Muslim states - Bangladesh and
Pakistan – alone account for 122 million each living below the poverty line
where as 100 million Muslims of India are also living below the poverty line
(IRTI, 2007, p.1 Sources suggest that about 72 percent of people in Muslim
countries do not use the formal financial services because financial system is
interest based which is prohibited in Islam (Karim, Tarazi and Reille, 2008). This
study attempts to give an overview of Islamic micro finance development in
Muslim countries while focusing on its operations in Pakistan. It takes a case
study of Akhuwat, an Islamic microfinance organization. It was established in
2001 and the objective was to help the people living in abject poverty with interest
free credit The research paper analyses the financial performance of Akhuwat for
the period 2002-2006 and gives recommendations for the future potential of
Islamic microfinance in the country.
LITERATURE REVIEW
Over the last few years micro-finance has been increasingly recognized as an
important component in poverty alleviation strategies. Poor households face
difficulty in generating regular and substantial income to save for future and are
extremely vulnerable to economic, political, and physical downturns. A little
drop in income or increase in expense can have a disastrous effect on their
already low standard of living. They have limited access to health care facilities;
have low literacy rate and poor living conditions. Death, sickness, or accident
may force them to dispose their property or some of the productive assets, which
in turn further decreases future income and current livelihood. The frequency of
losses is also greater for the poor; many are regularly exposed to natural disasters
(like flood), fire, and theft with limited means of recovery (Patel, 2004; Ahmad,
2007; Obaidullah, 2008).
Given the dominance of western culture and values as well as plight and
vulnerability of today’s Islamic world, there has always been an incessant
conflict between the two civilizations. Muslims have always been struggling for
decades at almost every walk of real life to retain their values and culture. The
philosophy behind such struggle is underpinned in powerful expression of
collective identity that is multiple and highly diversified following the contours
of each culture and historical formation of each identity. The feeling of this
collective identity has urged Muslim scholars to find solutions of current
economic problems to make their lives compatible with Sharī’ah and to
safeguard the Muslim Ummah against the perils of the western culture. (Yusuf,
2006; pp.56-63)
The World Bank estimates that there are over 7000 microfinance institutions,
serving some 16 million poor people in developing countries. The total cash
turnover of MFIs world-wide is estimated at US$2.5 billion and
the potential for new growth is outstanding. The Microcredit Summit estimates
that US$21.6 billion is needed to provide microfinance to 100 million of the
world's poorest families.
Ahmad (2007) opines that contemporary Islamic finance has been largely
disengaged from microfinance. On the one hand, most microfinance institutions
(MFIs) are not Islamic as their financing is interest based. On the other hand,
Islamic financial system has been dominated mainly by Islamic banks. He further
argues that MFI has to create various reserves to cover various risks arising due
to the nature of its assets and liabilities. To protect from withdrawal risks, the
MFI can use takaful and profit-equalization reserves to give depositors
competitive returns. The paper shows that the proportion of waqf funds that can
be allocated into microfinancing will depend on the takaful and economic capital
reserves.
Obaidullah (2008) has identified that absence of institutional credit guarantee is
an important factor that demotivates the commercial banks and IFIs to be
involved in micro-credit activities for low income groups of society as well as
small and medium enterprises. He maintains that it is essential to establish
linkages among various institutions at micro, meso as well as at macro level for
the growth of Islamic MF industry. He further asserts that if various
organizations including Govt. agencies, Central Bank, Commercial and Islamic
Banks, Takaful and Cooperative Companies as well as NGOs and NPOs could be
interlinked, they can reach at ‘the poorest of the poor’ of a society and
significantly contribute towards the development of micro-enterprises, enhancing
the financial inclusion and alleviating the poverty from the gross-root levels of a
society.
Frasca (2008) undertakes two seminal case studies in the use of Islamic finance
instruments in MFIs: a) the Sanduq project in Jabal Al-Hoss, Syria; and b) the
Hodeidah Microfinance Programme (HMFP) in Hodeidah, Yemen. He concludes
that Islamic MFIs can be both competitive with conventional MFIs in the region
and meet the reported demand for religiously tailored financial services for lower
income groups. If we are to assume that microfinance in general can improve
standard of living and alleviate poverty, Islamic MFIs appear to be doing as well
as their conventional microfinance counterparts.
In Pakistan, the condition of people is pathetic as compared to other Muslim
counties. Almost 80 percent of Pakistanis are poor according to the Economic
Survey 2005-06 (defined as ‘extremely poor’, ‘ultra poor’, ‘poor’, ‘vulnerable’
and ‘quasi-non poor’). The number of people in the lowest three of these income
categories is over 36 million yet according to a USAID study, only 600,000
people in Pakistan received microfinance in 2005. Although this is significant
growth from 60,000 in 1999, it leaves many people out. While some people not
using microfinance are just not interested in it, many may opt out of conventional
microfinance due to its reliance upon interest-based financing, prohibited by
Islam as riba (Goud, 2007).
Apart from the banks, there are two notable Islamic microfinance institutions
(IMFIs) in Pakistan: Akhuwat and Islamic Relief. This research paper takes an
overview of functions and operations of Akhuwat in the country and attempts to
see its contribution towards povety alleviation in the country based on its past
performance.
SUSTAINABILITY
1.Microfinance services for all living below the poverty line including the
“extreme poor”.
2.Interest free loans as a powerful tool against poverty.
3.The role of AKHUWAT is extending the helping hand and not doing
business with poor.
CONCLUDING REMARKS
This research project recognizes Islamic micro-finance as an important
component in poverty alleviation strategies. While conventional microfinance
products have been successful in Muslim majority countries, these products do
not fulfill the needs of all Muslim clients. Combining the Islamic social principle
of caring for the less fortunate with microfinance’s power to provide financial
access to the poor has the potential to reach out to millions more people, many of
whom say they would prefer Islamic products over conventional microfinance
products.
This research paper undertakes a case study of Akhuwat, an Islamic microfinance
organization operating in Pakistan. Critical financial analysis of Akhuwat
indicates that it is providing its services for all living below the poverty line
including the “extreme poor” and Interest free loans can be used as a powerful
tool against poverty. Yet Loan portfolio gorwth of Akhuwat declines with the
sharp decline of equity growth over the last 5 years that might pose some
constrainsts on its finanical stability in future. This challenge could be overcome
by integrating Islamic microfinance with NGOs, NPOs (non-profit
organizations), Zakah, Awqaf and with Takaful as well as with professional
training and capacity building institutions in Pakistan to provide Islamic
microfinanicial services to the poorest of the poor under one roof. It will help to
uplift the living standard of people and ultimately contribute towards the
economic development and enriched prosperity of the country.
REFERENCES
USA, http://www.grameenfoundation.org/